Inflation news firms up interest rate hike expectations

The rising cost of fresh vegetables and petrol helped push annual inflation to 1.4pc. This has firmed up expectations of an official interest rate hike early next year. Photo / Greg Bowker

Accelerating New Zealand inflation is firming expectations for an early rate hike next year, with consumer prices rising at the fastest quarterly pace and ended a year-long period where the annual pace was slower than the Reserve Bank's target.

Two-year swap rates rose as high as 3.59 per cent, the highest level since August 2011, and were recently up 3.3 basis points to 3.57 per cent.

Government figures released this morning showed the consumers price index increased 0.9 per cent in the three months ended September 30, its fastest pace since June 2011, and accelerating from a 0.2 per cent increase in June.

The annual pace of inflation accelerated to 1.4 per cent, back within the central bank's target band of between 1 per cent and 3 per cent, from 0.7 per cent in June, the slowest pace in 14 years, according to Statistics New Zealand.

"It now looks more clear the last quarter print was the bottom of the cycle," said Imre Speizer, market strategist at Westpac Bank in Auckland. "It keeps the pressure on the Reserve Bank to hike by March."

The tepid pace of inflation has meant the Reserve Bank hasn't had to hike the official cash rate from a record-low 2.5 per cent as a bubbling property market fails to spill over into increased consumer spending.

The central bank has been reluctant to lift the key rate as it might stoke investors to buy the kiwi, further strengthening an "over-valued" currency, though it has since signalled plans to raise the OCR next year. The kiwi recently traded at 83.91 US cents, from 83.75 cents immediately before the release.

Westpac's Speizer said the turnaround in the tradable component of inflation illustrated the effect of a strong currency on lowering imported prices was a temporary one, and that consumer prices are set to accelerate from here.

Tradable inflation, which includes goods and services facing international competition, rose 1.2 per cent in the September quarter, from a 0.5 per cent contraction in June. The annual pace of decline in tradable consumer prices shrank to 0.5 per cent in September from 1.6 per cent in June. The kiwi dollar averaged 77.09 on a trade-weighted basis in the September quarter, above the Reserve Bank's projection of 74.7.

The Reserve Bank is watching the cost of the country's construction boom in Auckland and Christchurch closely to see whether wage growth in those areas will spill over into wider inflation.

Prices for newly built houses increased 0.9 per cent in the quarter, taking the annual pace to 4.1 per cent.

ASB economist Christina Leung said increasing construction costs were starting to show up beyond Canterbury, where the rebuild of the country's second biggest city is underway, and will be under increased scrutiny for signs of it seeping into other consumer spending.